YourOwnHome

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Welcome

1. Agenda

2. Ground Rules

3. Introductions

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Objectives• If you are a pre-homebuyer:

• Explain the advantages and disadvantages of

renting versus owning a home

• Identify questions to ask to determine your

readiness to buy a home

• Identify the steps required to buy a home

• Identify basic terms and required disclosures

used in a mortgage transaction

Your Own Home 4

Objectives• Pre-homebuyers:

• Describe the advantages and disadvantages

of different mortgage options

• Describe how interest rates affect the amount

of house you can buy

• Explain how taxes and insurance affect a

monthly payment and the amount of house

you can buy

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Objectives• If you are a homeowner:

• Describe the advantages and disadvantages

of borrowing against a home

• Explain what to do if you are having trouble

making payments

• Describe different types of refinancing options

• Explain the advantages and disadvantages of

a reverse mortgage

• Identify predatory lending practices and loan

scams

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What Do You Know?

What do you know or want to

learn about buying or owning a

home?

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Renting a Home• Advantages:

• No property maintenance

• Rental contract 1 year or less

• No homeowner associated costs

• Disadvantages:

• You are not the owner

• Your rent might increase

• You might not be able to renew your contract

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Owning a Home• Advantages:

• Building equity and borrowing against it

• Good investment

• Tax-deductible mortgage interest

• Asset you can pass on to family members

• Disadvantages:

• Property maintenance and upkeep

• Not as easy to move as renting

• Risk of losing your home

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Five Steps to Buying a Home

1. Determine your readiness to buy a house

2. Determine how much mortgage you can

afford

3. Determine which mortgage option is best

for you

4. Qualify for a loan

5. Go through settlement

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Meet Patricia

• Patricia…

• Is a medical technologist

• Makes $49,200/year, or $4,100/month

• Is currently living with her parents

• Wants to know more about home ownership

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Step 1: Readiness to Buy A House

• Do you have:

• A steady source of income?

• Good credit history?

• Ability to pay debts, mortgage, and other

additional costs?

• Plans to move within 2 to 3 years?

• Money for a down payment and closing

costs?

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Down Payment and Other Expenses• Down payment:

• Typically 20% of the purchase price

• Smaller down payment options may be

available (e.g., 3% of purchase price)

• Other expenses:

• Household emergencies, repairs, and other

expenses

• Private Mortgage Insurance (PMI)

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Mortgage Payments

• Include principal and interest

• May include PMI, property taxes, and

homeowners insurance

• Should be no more than 28% of your income

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Other Questions to Ask Yourself

• Where do you want to live?

• What kind of neighborhood do you want?

• If you have children, what types of

schools should be in the neighborhood?

• How much space do you need?

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Activity 1: Is Patricia Ready to Buy a

House?Complete Activity 1 in the Participant Guide.

1. Read the scenario.

2. Answer the question.

3. Be prepared to explain your answer.

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Homebuyer Assistance Programs

• For programs in your area, check with:

• Your lender, real estate agent, or local

government about homebuyer assistance

programs

• A local Housing and Urban Development

(HUD)-approved homeownership counseling

agency

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Characteristics of Government

Programs

• Low down payment requirements

• Flexible underwriting standards

• Longer payment terms

• Homeowner education requirement

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• Prohibits discrimination in housing-related

transactions on the basis of:

• Race

• Color

• Religion

• Sex

• National origin

• Family status

• Handicap status

Fair Housing Act

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Activity 2: Does Patricia Have Enough

Money for a Down Payment?

Complete Activity 2 in the Participant Guide.

1. Read the scenario.

2. Answer the question provided.

3. Be prepared to share your answer.

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Mortgage Terms• PITI:

• Principal

• Interest

• Taxes

• Insurance

• PMI

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How Taxes and Insurance are Paid• Through escrow account

• The Real Estate Settlement Procedures Act

(RESPA) limits amount required to be held in

escrow account.

• Separately

• You are responsible for periodic payments.

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Four Cs of Loan Decision Making

Four factors lenders use to qualify you for a loan:

Capacity

Capital

Character

Collateral

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Step 2: Determine How Much

Mortgage Can You Afford

• Pre-qualification:

• Lets you know how much mortgage you can

afford

• Pre-approval

• Commitment from the lender to lend you

money

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Patricia’s Pre-Qualification• Pre-qualified for $165,000

• Rule of thumb estimate:

• 2 to 3 times their household income:

• Consider what you can afford if you

qualify for more!

$49,200 x 2 = $ 98,400

$49,200 x 2.5 = $123,000

$49,200 x 3 = $147,600

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Debt-to-Income (DTI) Ratios• Front-End Ratio:

• PITI or housing expenses should generally be

less than 25–28% of your monthly gross

income.

• Back-End Ratio:

• Housing expenses + long-term debt should be

less than 33–36% of your monthly gross

income.

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Activity 3: How Much Mortgage Can

Patricia Afford?

Complete Activity 3 in the Participant Guide.

1. Read the scenario.

2. Answer the questions.

3. Be prepared to share your answer.

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Mortgage Terms

15-Year Mortgage 30-Year Mortgage

• Borrow less money

because of larger

monthly payments

• Build equity faster

• Less interest to pay

• Lower interest rate

• Borrow more money

because of lower monthly

payments

• Build equity more slowly

• Can deduct more interest

from income tax

• Higher interest rate

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Mortgage Type

Fixed-Rate Mortgage Adjustable-Rate Mortgage

• Interest rate cannot

increase

• Payments are

predictable

• Interest rates could

go below your set

rate

• Interest rate can increase

or decrease

• Rates may be low for only

an initial period

• Monthly payments may

initially be lower than

fixed-rate loans, but can

increase significantly

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Step 3: Which Mortgage Option Is

Best for You

• Fixed-rate mortgage

• Adjustable-rate mortgage (ARM)

• Interest-only mortgage

• Biweekly payment mortgage

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Interest-Only Mortgages

• Pay only the interest, not the principal, for a

fixed term (e.g., 5 to 7 years)

• After the fixed term, you can:

• Refinance

• Pay the balance in a lump sum

• Start monthly mortgage payments toward the

principal

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Benefits of Interest-Only Loans

• A good choice if you:

• Do not plan to live in your home for more

than the interest-only period

• Have modest current income that will go up

in the future

• Are trying to resolve credit issues so that

you can refinance into a lower fixed rate

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Pitfalls of Interest-Only Loans

• Payments:

• May not cover all of the interest owed,

prevents you from building equity

• Can become unaffordable after the interest-

only period

• You may incur refinancing costs if you can

no longer afford the payments.

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Biweekly Payment Mortgage

• A fixed-rate conventional mortgage with

payment due every 2 weeks

• Alternative: Add more money to your

monthly payment

• Make sure your lender does not charge a

prepayment penalty

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Shop, Compare, Negotiate

• Check newspapers and the Internet for terms and rates

• Negotiate your best price

• Let lenders compete for your business

• Get costs in writing

• Use the APR and GFE to compare all costs

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Good Faith Estimate

• Settlement services cost estimate

• Given to you when you apply for the loan

• Keep your GFE to compare with the final

settlement costs

• Ask the lender questions about any

changes

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Mortgage Shopping Worksheet

• Federal law requires the lender or broker

to:

• Disclose estimates of how much the loan will

cost and the APR (Truth in Lending

Disclosure)

• Give you an estimate of closing cost fees and

the money required at closing (GFE)

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Step 4: Qualify For a Loan

• Obtain pre-qualification and pre-approval

• Include homeowner’s association dues

when calculating your housing expenses

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Activity 4: Does Patricia Qualify for a

Loan?

Complete Activity 4 in the Participant Guide.

1. Read the scenario.

2. Answer the question provided.

3. Be prepared to share your answer.

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Debt-to-Income (DTI) Exceeds

Recommended Ratios

• You might still qualify for a loan

if you:

• Have ability to pay more toward

housing expenses

• Show evidence of sustained, good

credit history

• Make larger down payment

• Have cash reserves

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Step 5: Go Through Settlement

• Settlement:

• Sign documents to finalize the sale of the

house and any mortgage financing.

• Right to review the settlement statement at

least 1 day before closing.

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Having Trouble Making Payments?

• Contact your lender immediately

• Get help from a trained reputable housing

counselor at no charge or for a small fee

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Tapping Into Your Home’s Equity

• Home equity loans

• Home equity lines of credit

(HELOC)

• Refinancing and cash-out

refinancing

• Reverse mortgages

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Home Equity Loans

• One-time loan for a lump sum

• Typically at a fixed interest rate

• Equal monthly payments over a set period

of time

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Home Equity Lines of Credit

• Works like a credit card:

• Draw from the line of credit as needed

• Repay the principal and available credit goes

up again

• Interest rates are typically variable

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Advantages of Home Equity Options

• Flexibility to finance major expenses

• Lower interest rate than credit cards

• Tax-deductible interest

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Home Equity Options Risks

• Home is collateral

• Housing values can decrease

• Rates/payment may increase

• Temptation to use the money for unwise

investments or purchases

• Use caution and self-discipline

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Your Rights Under Federal Law

• You have 3 business days after signing loan papers to cancel the deal without penalty.

• Must cancel the deal in writing

• Lender must return any fees or finance charges you paid

• Does not apply if you are buying a home or refinancing without borrowing additional money

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Refinancing Options

• Refinancing: pay off an existing home

loan replace with a new loan.

• Cash out refinance loan: can borrow more

money than owed on the loan to be

replaced.

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Cash-Out Refinancing Example

• Current Mortgage: $100,000 at 9.95%

• Owe a total of $87,000

• Monthly payment: $873.88

• Want $20,000 for improvements

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Cash-Out Refinance ExampleOption 1:

• Refinance $107,000 ($87,000 + 20,000)

• Interest rate: 6.02%

• Monthly payment: $642.90 x 30 years

• Total = $231,442.40

Option 2:• Refinance $87,000 at $522.73 x 30 years

• Home equity loan: $20,000 at 7.36% x 20

years

• Total = $226,440.75

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Reverse Mortgage• Borrowing against home equity to receive

cash:

• In a lump sum

• Through monthly payments

• As a line of credit you can tap when needed

• Homeowners must be at least 62 years old.

• At least one owner must live in the house

most of the year.

• Home type must be eligible.

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Reverse Mortgage Considerations

• Must repay loan + interest when you sell,

move, or die.

• Amount owed increases over time.

• Continue to pay property taxes, insurance,

and repair costs.

• Heir must repay the loan to keep the house.

• Up-front costs make the first years of the

loan relatively expensive.

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Predatory Lending Practices

Marketing tactics,

collection practices, and

loan terms that deceive

and exploit borrowers

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Department of Housing and Urban

Development

• Funds:

• Post-home ownership course

• Housing counseling agencies

• Contact HUD for a list of HUD-

approved housing counseling

agencies:

• 1-800-569-4287

• www.hud.gov

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Summary

• What final questions do you have?

• What have you learned?

• How would you evaluate the training?

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Conclusion• You learned about:

• Renting versus owning your home

• The steps required to buy a home

• Questions to determine if you are ready to

buy a home

• The components of a mortgage

• Different mortgage options for buying a home

• Tapping into your home’s equity

• Pitfalls and dangers of unwise mortgage

refinancing